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How should I value my business for legal purposes?
Thread poster: Wendy Cummings

Wendy Cummings  Identity Verified
United Kingdom
Local time: 06:19
Member (2006)
Spanish to English
+ ...
Nov 18, 2015

I am a sole trader in the UK, and have been working as a freelance translator for 10 years. I work from a home office, and so have no premises or plant to speak of. I have a client portfolio of about 15 regular (monthly) clients, plus about 15 irregular clients. My full client portfolio (every client I have worked for), amounts to over 100. I work almost entirely in Trados and have both termbases and translation memories in French and Spanish, built up over the years.

I am in the process of drafting a prenuptial agreement in advance of my marriage next year. I have been advised to place a value on my business, since this is the value that would get "earmarked" in the event of a divorce.

(e.g.: if the value is now £0, and a divorce judge deems it has increased in value, then I would get only half that increase in value; If I put £10 and a judge deems it has increased to £20, then I would get £10 + £5 (the earmarked lot plus half the increase in value).

How therefore should I go about valuing my business?

Since my clients use my services "intuitu personae", there is no real transferable value to my business. However, I do have a client portfolio and those clients place faith in any other translators who I may recommend. I also have the TMs and TBs, which are arguably of value.

Has anyone been in this same situation?

I would appreciate advice (and please, for the avoidance of doubt, I do not wish to enter into any discussion about the pros or cons of the prenup itself).

Wendy


 

Jean Lachaud  Identity Verified
United States
Local time: 01:19
English to French
+ ...
Isn't that a question for an accountant?? Nov 18, 2015

Accountants should be perfectly qualified to value a business. Don't they do that every day?

 

Wendy Cummings  Identity Verified
United Kingdom
Local time: 06:19
Member (2006)
Spanish to English
+ ...
TOPIC STARTER
Widening my sources Nov 18, 2015

JL01 wrote:

Accountants should be perfectly qualified to value a business.


I have also contacted my accountant, but I was wondering whether anyone else had experience they could share with me.


 

Sheila Wilson  Identity Verified
Spain
Local time: 06:19
Member (2007)
English
+ ...
I don't really understand the relevance in this particular circumstance. Nov 18, 2015

Wendy Leech wrote:
I have been advised to place a value on my business, since this is the value that would get "earmarked" in the event of a divorce.

(e.g.: if the value is now £0, and a divorce judge deems it has increased in value, then I would get only half that increase in value; If I put £10 and a judge deems it has increased to £20, then I would get £10 + £5 (the earmarked lot plus half the increase in value).

How therefore should I go about valuing my business?

Your lawyer seems to be thinking of it in terms of selling the business as a going concern, as happens from time to time when freelancers retire or decide to stop freelancing.

But that isn't about to happen if/when you split. Your husband will play no active role in your business, and he will have no claim to it at all. YOU are your business - and it can't be shared any more than you can!

What can be taken into account is how much wealth the business has brought into the marriage - and that's quite simply its turnover during the period you're married, plus the money you have in the bank now, isn't it? After a divorce, you would continue to be the sole owner of your TMs etc and you would be the only one to have any contact with your clients, who presumably would have no reason to desert you.


 

Wendy Cummings  Identity Verified
United Kingdom
Local time: 06:19
Member (2006)
Spanish to English
+ ...
TOPIC STARTER
Marital property Nov 18, 2015

Sheila Wilson wrote:

YOU are your business - and it can't be shared any more than you can!


Although I may have misunderstood the situation, from what my solicitor explained every single asset I own would go into the divorce pot. That includes pension funds (in my name only), a house (in my name only) and savings (in my name only); plus therefore the business.

The standard method without a prenup would be for all assets to be split fifty-fifty - because under marital law all property becomes joint-owned.

It therefore doesn't matter whether I own it now, upon marriage (or rather, upon divorce), it becomes classified as joint property and up-for-grabs.


 

Inga Petkelyte  Identity Verified
Portugal
Local time: 06:19
Lithuanian to Portuguese
+ ...
Sales volumes + equipment Nov 18, 2015

When evaluating a business, one has to take into account the sales volumes, equipment (salvage value of it), prestige (your name value) and IP, simplifying the process. In more complex cases, investments shall be accounted, too.
Dissecting your busines into the above may help you have a more clear view:
Business volume: average for the past 2 years? Is it growing? Add the growth rate;
Equipment: any hardware, books, dictionraie you use and aren't yet depreciated in the value. Software: it's normally renewable so see what's the actual point between renovations;
Prestige: does your name itself sell? (Like James Patterson, for instance?) Not undervaluating, but it would be difficult to put this item on the books. Skip;
IP: your translation memories: for how much could you sell them, if any? Average estimation.
In the bottom line, I would stick mostly to the sales volumes.


 

Preston Decker  Identity Verified
United States
Local time: 01:19
Chinese to English
Perhaps your business is not worth much at all? Nov 18, 2015

I would imagine that in the event of divorce, the law would be far more interested in growth in personal assets/monetary value and possibly annual income growth since marriage than the value of your freelance business. It seems to me that the value of a freelancer's business will always be close to zero due to a lack of tangible assets. Even our clients are not true assets, as they don't represent guaranteed revenue--your clients could all choose not to use you in the future, in which case you'd be left with nothing.

My guess would be that in the event of divorce, your ex-spouse would be eligible to receive half of your personal and business asset growth since marriage. In some jurisdictions, they might even be able to sue for future earnings (half of the difference between your pre-marriage earnings and earnings at time of divorce). I find it hard to believe that a court would find that the value of your freelance business is distinguishable from your annual earnings unless you made major purchases of computers/property for the business.

I'm not sure if the same concern would apply in the UK, but in the US I would actually be cautious about over-estimating the value of my business on a pre-nup out of fear that an IRS audit might find the document and hold that I had been underpaying taxes.

So perhaps you can just put a relatively small number for the value of your business (the value of your computer+any other technology you use), and concentrate more on defining your annual income and personal assets?

Of course, I'm not a lawyer, nor do I live in the UK, so this is really all wild speculation.

[Edited at 2015-11-18 16:57 GMT]


 

Wendy Cummings  Identity Verified
United Kingdom
Local time: 06:19
Member (2006)
Spanish to English
+ ...
TOPIC STARTER
Risky Nov 18, 2015

Preston Decker wrote:

So perhaps you can just put a relatively small number for the value of your business (the value of your computer+any other technology you use), and concentrate more on defining your annual income and personal assets?



I had in fact suggested to my solicitor that my business is, tangibly, worth next to nothing. Her response was that if a divorce court was then to decide it WAS worth something, I would not have earmarked any pre-marriage value for my own safekeeping, and the whole of the value would get split 50/50.

She was quite insistent I try to put a value on it. Hopefully my accountant will be of more help.


 

Sheila Wilson  Identity Verified
Spain
Local time: 06:19
Member (2007)
English
+ ...
What about the other side of the coin? Nov 18, 2015

Wendy Leech wrote:
It therefore doesn't matter whether I own it now, upon marriage (or rather, upon divorce), it becomes classified as joint property and up-for-grabs.

To be honest, the whole thing is rather mind-boggling for me. I've never been good with numbersicon_frown.gif. But while the idea seems to have some sense if you're talking about products, it doesn't seem to me to make much sense when you're providing an intellectual service. It isn't property, it's innate.

However, one thought comes to mind: What if your business fails, with massive debts? There's only one way that's likely to happen, I imagine: if you are sued for some grave error. If that happened, what would be the outcome? The whole idea of freelancing is that we trade under our own names, not as legal entities e.g. at the head of a limited liability company. In theory, we are personally responsible for our debts. And as a married person, our spouse would also be liable. (In France I was able to protect his 50% of the house we lived in. I haven't found out if that's possible here, and anyway we have two houses and I doubt I could protect both from a creditor.)

But as I said, I find the whole topic difficult to digest, so I'll be very happy to bow out of the discussion.


 

Jean Lachaud  Identity Verified
United States
Local time: 01:19
English to French
+ ...
What about prenup? Nov 18, 2015

Now, I am completely puzzled.

I had assumed that the purpose of a prenuptial agreement is to clearly identify what the future spouses own, so that only what has been acquired during the marriage gets split in case of divorce.

Then again, I am married without a prenup.


 

Inga Petkelyte  Identity Verified
Portugal
Local time: 06:19
Lithuanian to Portuguese
+ ...
Capital gains Nov 18, 2015

is an acquisition in this case.

 

Preston Decker  Identity Verified
United States
Local time: 01:19
Chinese to English
Risk of admitting your business is worth something Nov 18, 2015

Wendy Leech wrote:

Preston Decker wrote:

So perhaps you can just put a relatively small number for the value of your business (the value of your computer+any other technology you use), and concentrate more on defining your annual income and personal assets?



I had in fact suggested to my solicitor that my business is, tangibly, worth next to nothing. Her response was that if a divorce court was then to decide it WAS worth something, I would not have earmarked any pre-marriage value for my own safekeeping, and the whole of the value would get split 50/50.

She was quite insistent I try to put a value on it. Hopefully my accountant will be of more help.


I'm going to play the devil's advocate on this one, just in case your lawyer is making a mistake. Not all lawyers are good at what they do, so it's at least a possibility.

Let's say that you estimate your business's value at 50,000 pound, based on some combination of expected earnings, client value, etc. In 10 years you unfortunately are in a position where your pre-nup comes into play. Over these 10 years your annual earnings from translation have increased 50%. It would then logically follow that your business value has increased by about as much. Let's say that opposing counsel successfully argues that as your earnings have increased 50%, the value of your business has also increased 50% to 75,000. If this is the case, 12,500 of that 25,000 increase belongs to your spouse. What then? As a freelancer, you are your own business, and you obviously can't sell yourself, so it's possible a judge would simply order that you owe that 12,500 in cash.

So it seems to me that admitting in your pre-nup that your business does have an inherent value could potentially be just as damaging as saying it has no value (if you say it has no value now, then at least you have a leg to stand on).

The truth is, if your fiance's feelings weren't involved, the most logical step would be to expressly state in your pre-nup that for the purposes of the pre-nup, your business value, both now and in the future, is zero so long as you continue to operate as a sole trader. If you don't think your fiance would have a problem with getting into nitty gritty details in the pre-nup, perhaps you could ask your lawyer if the pre-nup can directly deal with this issue?


 

Charlie Bavington (X)  Identity Verified
Local time: 06:19
French to English
Hypothetically.... Nov 18, 2015

Wendy Leech wrote:

I had in fact suggested to my solicitor that my business is, tangibly, worth next to nothing. Her response was that if a divorce court was then to decide it WAS worth something, I would not have earmarked any pre-marriage value for my own safekeeping, and the whole of the value would get split 50/50.


Indeed. At the very least, I'd be saying "Oi, what about the receivables, they're an asset, where's my half, eh?"icon_smile.gif

When I was self employed, rather than a freelancer with a limited company as I am now (friendly nudge to Sheila - the one does not exclude the other!), I never bothered preparing a balance sheet, as there is no requirement to do so. Although I didn't exactly value the business at nil, I wasn't sure what it was worth.

My first year as a company, I did have to, and the resulting notional value of the company came as something of a surprise. I hasten to add the legal form was the only real change (disregarding £100 capital). Cash and receivables, even minus future tax liability, can soon add up. And this was without attributing any value to TMs, goodwill, or anything of that kind.

Balance sheets are not the only method, of course. Putting a value on future income/cash flow is another way. Comparing the values at which similar businesses are sold is a third, although in the case of freelance translation businesses, our conviction we are all irreplaceable seems to mean this doesn't happen much. As I mentioned in a thread a while back, I'd potentially be open to the idea of buying anyone out, but I seem to be in a very small minorityicon_smile.gif I digress...

Anyway, in the friendliest possible way, please dismiss the idea your business is of little or no value.

As an offshoot, I did wonder whether changing to a limited company might offer more protection, but on reflection I'm not so sure. You could mention it to an advisor, if you were willing to consider it, to see if it might help....?


 

Noni Gilbert  Identity Verified
Spain
Local time: 07:19
Spanish to English
+ ...
Get married in Spain... Nov 18, 2015

Probably completely irrelevant and inappropriate to your case, but you'll see why I make the comment.

But before that, a quick "congratulations on imminent change of status" is due, we seem to have lost sight of the fact that this is an exciting moment for you, while dealing with all the practicalities.

Here in Spain, you can choose between "gananciales" - what's yours is mine, what's mine is yours - and "separación de bienes" - what was mine continues to be mine. But, as I understand, this is largely concerned with property, although I think it would also extend to the ownership of the business. What I don't know is if that just means the client list, and consumables, as opposed to goodwill etc. Money made from the business is another question. Unless you tied it up very strongly with the business by converting it into business assets. The argument could be over the source of the funding for the increase in value of the business. Tricky one.

Very best of luck Wendy!


 

jyuan_us  Identity Verified
United States
Local time: 01:19
Member (2005)
English to Chinese
+ ...
Irrelevant, off-topic but Nov 18, 2015

A Chinese couple would think this way: If you are thinking about divorce now, why in the first place did you want to get married?

This would come to the mind of another Chinese couple: "Nowadays everything, including marriage, can be measured in monetary terms".

This is totally a cultural thing. In China, the party that initiates a divorce would give up everything to the other party. It is a common practice among the rich people in China.

I know things are changing. Some couples do get their pre-marriage assets notarized in China. I don't know the implications of such a notarization, though.

Don't take this personally. Just do whatever you are supposed to do.

[Edited at 2015-11-18 19:22 GMT]

[Edited at 2015-11-18 23:15 GMT]


 
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